Is There Hope Yet for MBIA?

I got a phone call Thursday afternoon from MBIA spokesman Kevin Brown. He mainly wanted to clear up one thing about my blog that morning: MBIA Insurance Corp (NYSE:MBI) is not, technically, "going into run-off". It's just not writing much in the way of new business right now, that's all.

Given that an insurance company in run-off is one which isn't writing new business, you'd think this is a distinction without much of a difference, and you might be right. But there is a difference: an insurance company in run-off will never write new business. And, for the time being at least, MBIA is keeping its options open. Once what Erin Callen might call "visibility" improves, it could resuscitate its existing insurance subsidiary and get it up and running again.

In the short run we expect that the de-leveraging of the insurance company will accelerate as more issues are refunded and our liability is extinguished, more installment policies are cancelled and minimal new business is added to the portfolio. In an ironic twist, the actions of the rating agencies will accelerate the speed with which we exceed the target levels of capital required for a Triple-A. In addition, we continue to believe that rating agencies' stress cases will begin to move down over the next 12 to 18 months as more hard data demonstrates the actual severity of projected mortgage-related losses. Bottom-line, we believe that the capital required to support our existing insurance company portfolio will continue to decrease over the next few years in a dramatic fashion.

So, fast forward 12 to 18 months, and assume that Brown's projections turn out to be accurate. At that point, in order for MBIA Insurance Corp to get up and running again, three things would probably have to happen, in no particular order: the markets would have to regain confidence in MBIA's claims-paying abilities; the ratings agencies would have to give MBIA its triple-A rating back; and the markets would have to regain confidence in the ratings agencies' triple-A ratings.

None of these things seems particularly likely right now, I have to say. But Brown did make a reasonably strong case that the present state of affairs is pretty unsustainable too.

For one thing, a lot of bonds are trading right now as though the MBIA guarantee is worthless. That's just silly. Even if MBIA is less creditworthy than the entity it's guaranteeing, the guarantee is still worth something. An insurance company doesn't need a triple-A rating to pay out on its guarantees, it just needs to not be bankrupt. Remember that MBIA is still double-A: Bill Ackman might not agree with that, but as far as the ratings agencies are concerned, at least, you can still have as much confidence in MBIA as you can in any major bank.

And there's also a case that someone should be writing municipal bond insurance, since these bonds are generally bought by retail investors who can't be expected to do sophisticated credit analysis. If their bonds have a triple-A wrap, they can rest assured that they will get all their interest and principal payments on time. Might the insurer lose its triple-A rating at some point, in a highly stressed scenario? Sure. But there's a very, very long way from there to a payment default, which would require not only the insurer but also the municipality going bankrupt.

Now MBIA is something of a tarnished brand at this point, and it's unclear why municipalities should choose MBIA to wrap their bonds, or why retail investors should have faith in the company. If those people can get the same service from Warren Buffett, then it makes sense, at the margin, to go elsewhere instead.

So I'm not particularly bullish on MBIA's future. But it does have some very good credit analysts, who have performed pretty well so far: it was basically the structured finance people who blew the company up. Whether those analysts end up working for a new triple-A subsidiary, or whether they manage to turn the current one around, there is a possibility that they'll be able to add value somewhere. The risk to MBIA, of course, is that they'll leave their current employer and wind up adding their value to another entity entirely. I'm sure there are quite a few new distressed-debt funds who would be happy to poach them away.